The principle of full disclosure in the marketing of virtual currencies is a recent focus of regulatory bodies as they slowly confirm that these cryptocurrencies are securities or investment products.
In a Press Release dated Nov. 29, 2018, the Securities and Exchange Commission reported that it had settled charges with Floyd Mayweather, Jr., and Khaled Khaled (known as DJ Khaled) for failures to disclose payments they received for promoting investments in Initial Coin Offerings (ICOs).
These settled charges represent the SEC's first touting (attracting customers by illegal means) violations directly related to ICOs.
ICOs and Virtual Currencies May Be Securities
Mayweather and Khaled's problematic statements via social media came after the SEC issued its DAO (Decentralized Autonomous Organization) Report in 2017, which clarified and warned that tokens or other virtual products sold in ICOs could be considered securities, requiring all those who offer and sell those products in the U.S. to comply with all federal securities laws. Such clarification by the SEC brings into play laws which govern the marketing of securities in general, including:- Section 5 of the Securities Act of 1933, which mandates that the offer or sale of securities to the public must be accompanied by the full and fair disclosure necessary to enable prospective investors to make fully-informed investment decisions; and
- The Advertising Rule, which prohibits the direct or indirect publishing, circulating, or distributing of any advertisement that contains any false or misleading statements.
SEC Officials: Be Wary of Celebrity Endorsements of Virtual Currencies and Other Securities
Comments by SEC Enforcement Division Co-Directors Stephanie Avakian and Steven Peikin provide important points of caution regarding investment marketing tactics:- Paid endorsements cannot be presented as unbiased recommendations; full disclosure to investors is an absolute requirement.
- Investors must maintain a healthy awareness that social media influencers, including celebrities, are most often paid promoters, not qualified investment professionals.
- As paid promoters, what these celebrities say on behalf of firms selling securities must comply with performance marketing standards.